Susan has a 5-year “bunny bond” with a yield to maturity of 6.4% that will be au

ID: 2652200 • Letter: S

Question

Susan has a 5-year “bunny bond” with a yield to maturity of 6.4% that will be

automatically reinvested next month. She is considering liquidating the bond and

reinvesting in a 10-year 3.5% coupon bond with a yield to maturity of 6.5%. Market

rates are very unstable and are just as likely to rise or fall over Susan’s 5 year time

horizon. The best action for Susan is to

A: Invest in the 10-year bond since the yield is higher

B: Invest in the 10-year bond because it has greater maturity

C: Invest in the 10-year bond since the coupons can be reinvested

D: Reinvest in the “bunny bond” to avoid loss of accrued interest

E: Reinvest in the “bunny bond” to lock-in the yield

Susan has a 5-year “bunny bond” with a yield to maturity of 6.4% that will be

automatically reinvested next month. She is considering liquidating the bond and

reinvesting in a 10-year 3.5% coupon bond with a yield to maturity of 6.5%. Market

rates are very unstable and are just as likely to rise or fall over Susan’s 5 year time

horizon. The best action for Susan is to

A: Invest in the 10-year bond since the yield is higher

B: Invest in the 10-year bond because it has greater maturity

C: Invest in the 10-year bond since the coupons can be reinvested

D: Reinvest in the “bunny bond” to avoid loss of accrued interest

E: Reinvest in the “bunny bond” to lock-in the yield

Answer...

B: Invest in the 10-year bond because it has greater maturity

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